AOL Jumps After $1.06 Billion Patent Accord With Microsoft

The AOL Inc. website is displayed for a photograph in New York on Monday, April 9, 2012. Photographer: Scott Eells/Bloomberg

April 9 (Bloomberg) -- AOL Inc., under shareholder pressure
to make changes as revenue shrinks, agreed to sell and license
patents to Microsoft Corp. in a transaction valued at $1.06
billion, triggering its biggest stock gain in two years.

AOL rose 43 percent to $26.40 at the close in New York, the
biggest one-day increase since Nov. 25, 2009. The shares had
lost 8.2 percent of their value in the past year before today.
Microsoft, meanwhile, fell 1.3 percent to $31.10 today.

The arrangement, which will give more than 800 patents and
related applications to Microsoft, lets New York-based AOL
generate additional funds amid slow advertising growth and a
decline in dial-up Internet subscribers. AOL, whose revenue has
dropped 29 percent since it was spun off from Time Warner Inc.
in late 2009, has faced pressure from shareholder Starboard
Value LP to consider moves such as a patent deal.

“Few people were anticipating that they were going to
generate $1 billion-plus of cash,” said Tom Forte, an analyst
at Telsey Advisory Group in New York. “The company has done an
incredible job of creating value from their patent portfolio.”

Microsoft, the world’s biggest software maker, is adding
the patents as it tussles with Motorola Mobility Holdings Inc.
in the courts to protect intellectual property rights related to
the Windows Phone operating system and Xbox video-gaming
consoles. Technology giants such as Apple Inc. and Google Inc.
also are building patent war chests in an effort to fend off
litigation and defend their products.

More Artillery

“They’re building up their ammunition,” said Ed Maguire,
an analyst at Credit Agricole Securities in New York. Microsoft
may need the patents to go after the manufacturers of Android
handsets, which license the operating system from Google, he
said. “It’s certainly worth Microsoft’s time and resources to
go out and acquire something that lets you extract money from
the Googles and the handset makers.”

Other companies that expressed interest in acquiring AOL’s
patents included Amazon.com Inc., EBay Inc., Facebook Inc. and
Google, according to a person familiar with the sale process.

Representatives of those companies declined to comment on
involvement in the auction. Reuters reported on their interest
in acquiring AOL’s patents earlier today.

Litigious Industry

Microsoft gains nonexclusive license to AOL’s retained
patent portfolio, the companies said today in a statement. AOL
will hold more than 300 patents and applications after the
transaction. Microsoft, which had $52.7 billion in cash and
equivalents last year, is trying to keep the patents away from
competitors, said James Conley, a professor at Northwestern
University who studies patents.

“The fact that AOL was able to get the money it did as
fast as it did for its patents, and from Microsoft, is an
indication of how litigious the space has become,” Anthony
DiClemente, an analyst at Barclays Capital Inc. in New York,
said in a report today.

Kevin Kutz, a spokesman for Redmond, Washington-based
Microsoft, said the company isn’t ready to comment on what the
patents cover or what the company will use them for. Microsoft
historically has used patents more for licensing than lawsuits,
he said.

‘Clear Focus’

Tim Armstrong, AOL’s chief executive officer, said he
expects the license arrangement with Microsoft to generate $100
million over the life of the patents.

“This strengthens our ability to give more resources back
to shareholders,” Armstrong said in an interview. It “allows
us now to have a clear focus on operating our core strategy of
turning brands into businesses.”

AOL reached the agreement late on April 5 after an open
auction, with many companies submitting bids, Armstrong said. He
declined to identify the other bidders.

AOL said it plans to return a “significant portion” of
the sale proceeds to shareholders. Had the patents changed hands
last year, AOL said it would have had about $15 per share of
cash on hand as of Dec. 31, 2011. The company ended last year
with $407.5 million in cash and equivalents, down 49 percent
from 2010.

Starboard, which started pushing for change last year, had
said AOL’s patent portfolio could yield more than $1 billion.
Patent-advisory firm M-Cam Inc. estimated that AOL’s patent
portfolio would only be valued at about $290 million in a sale.
Jeffrey C. Smith, Starboard’s co-founder and CEO, declined to
comment on the Microsoft transaction.

Huffington Post, Patch

Shareholders have called for AOL to turn around investments
in the Huffington Post, acquired as part of a $315 million
transaction last year, and Patch, whose local news sites are
designed for communities with populations of 15,000 to 75,000.

Patch may have lost as much as $150 million in 2011, based
on fixed expenses of $160 million and an “immaterial” revenue
contribution as low as $10 million, Starboard said in December.

“They will probably not be using the cash to make a major
acquisition or invest in Patch in a bigger way, for instance,”
said Clayton Moran, an analyst at Benchmark Co. in Delray Beach,
Florida. “Not only is the search business hindering revenue
growth, but their display business is losing share as Google and
Facebook bring in cheaper inventory.”

AOL has struggled to revive revenue growth after separating
from Time Warner, as the company competes for advertising
dollars with Google and Facebook. AOL’s sales declined in each
quarter last year, and revenue this year is estimated to drop
3.7 percent to $2.1 billion, according to analysts’ projections
compiled by Bloomberg.

Yahoo Deal

Armstrong had been in talks with private-equity firms as
recently as September, when the CEO approached potential
financial partners about combining AOL with Yahoo! Inc., two
people said at the time.

Starboard had a 5.2 percent stake in AOL as of February.
The fund said in a Feb. 24 statement that it was “increasingly
uncomfortable” with the direction AOL and the board leadership
are taking.

Under the terms of the deal, Microsoft will have to pay AOL
a fee of $211.2 million if it chooses to end the transaction.
The deal is expected to be completed by the end of 2012, upon
receiving regulatory approvals.

Microsoft has accused Motorola Mobility, the mobile-phone
maker being acquired by Google, of infringing seven patents and
is seeking to block U.S. imports of devices that violate its
intellectual property rights. A U.S. trade agency is reviewing a
judge’s finding that only one of those patents was infringed.

Separately, Motorola Mobility has demanded $4 billion a
year in patent royalties for use of technology critical to
functioning of the Xbox, Microsoft said in a March 30 filing.